December 13, 2023

Del. Chancery Says Duty of Disclosure Extends to Stockholders from Whom Consent Isn’t Sought

Earlier this year, Meredith blogged about the Delaware Chancery Court’s decision in New Enterprise Associates 14, L.P. v. Rich, (Del. Ch.; 5/23).  That blog dealt with the portion of Vice Chancellor Laster’s opinion that focused on the enforceability of a stockholder’s covenant not to sue.  This recent Richards Layton article addressed another aspect of the opinion – whether the fiduciary duty of disclosure extends to stockholders whose consents were not sought in a consent solicitation. As this excerpt explains, the Vice Chancellor concluded that it did apply:

The Court of Chancery assessed whether stockholders whose consents were not sought could challenge the sufficiency of disclosures made in a consent solicitation. There, a Delaware corporation sought to amend its certificate of incorporation to increase the number of authorized shares in advance of a preferred stock offering and solicited written consents from a limited subset of stockholders who ultimately approved the amendment.

Dissenters whose consent was neither sought nor required challenged the solicitation’s disclosures as inadequate. The Court of Chancery concluded that these stockholders could challenge the consent solicitation’s disclosures as the product of a breach of fiduciary duty despite having never received them. The court reasoned that actions consenting stockholders are induced to take can harm stockholders not asked to consent because the outcome of stockholder votes can harm the latter.

The article points out that the outcome that potentially harmed the non-consenting stockholders was a preferred stock offering made possible by the consent action.  Vice Chancellor Laster concluded that this harmed the non-consenting stockholders at the “entity level” and not at the individual stockholder level because they did not receive the challenged disclosures.  Accordingly, he concluded that that the plaintiffs could only challenge the disclosures derivatively.

John Jenkins